The Strategy of

International Business
Chapter 12

© McGraw Hill Companies, Inc., 2000

© McGraw Hill Companies, Inc., 2000
12-1
 The Firm as a Value Chain
Primary Activities:
Those activities having to do with creating, marketing
and delivering the product to customers and providing
support and after-sales service.
Support Activities:
Provide inputs that allow primary activities to occur.
An Efficient Infrastructure:
helps create value and reduce the cost of creating
value.
© McGraw Hill Companies, Inc., 2000
12-2
 The
The Firm as aa Value
Firm as ValueChain
Chain

Organizational infrastructure
Support
Information systems
activities
Human resources
Research and development
Materials management
Manufacturing Marketing

Primary activities
Figure 12.1

© McGraw Hill Companies, Inc., 2000

12-3
 The Role of Strategy
Strategy:
Actions managers take to attain the goals of the
firm.
Need to identify and take action that lowers the
cost of value creation and/or differentiates the
firm’s product through superior design, quality,
service, or functionality.

© McGraw Hill Companies, Inc., 2000

12-4
Profiting from Global Expansion

International firms can:

Earn a greater return from
distinctive skills or core competencies.
Realize location economies by dispersing value
creation activities to locations where they can
be performed most efficiently.
Realize greater experience curve economies,
which reduces the cost of value creation.

© McGraw Hill Companies, Inc., 2000

12-5
 Location Economies Assembly

Parts
Sales

Advertising Design

Pontiac LeMans Parts

Parts
© McGraw Hill Companies, Inc., 2000
12-6
 Caveats
When making location decisions:
Consider trade barriers and
transportation costs.
Assess political and
economic risks.

© McGraw Hill Companies, Inc., 2000

12-7
 Experience Curve Economies
Learning Effects:
Labor productivity increases over time as individuals
learn the most efficient ways to perform particular tasks.
Economies of Scale:
Reductions in unit cost achieved by producing a large
volume of a product.
Strategic Significance:
Moving down the experience curve allows a firm to
reduce its cost of creating value.

© McGraw Hill Companies, Inc., 2000

12-8
 The Experience Curve

Unit costs
Moving down the curve reduces
the cost of creating value
B

Accumulated
output

Figure 12.2

© McGraw Hill Companies, Inc., 2000

12-9
 Firms Face Two Conflicting
Concepts (Pressures) Overseas

Reduce costs.
Be responsive to local
needs.

© McGraw Hill Companies, Inc., 2000

12-10
 Pressures for Cost Reduction and
Local Responsiveness
High
Company Company
A C

Cost Generally reflects

pressures the position of most
companies
Company
Low B

Low High
Figure 12.3 Pressures for local responsiveness

© McGraw Hill Companies, Inc., 2000

12-11
 Cost Reduction
 Desire to reduce costs by:
Mass production
Product standardization.
$
Optimal location production.
 Hard to do with commodity-type products.
products serving universal needs.
Also hard where competition is in low cost
producing location.
 Finally, int’l competition creates price pressures.

© McGraw Hill Companies, Inc., 2000

12-12
 Local Responsiveness

Different consumer tastes and

preferences.
Different infrastructure and practice.
Differences in distribution channels.
Government demands.

© McGraw Hill Companies, Inc., 2000

12-13
 McDonalds
McDonald’s overseas experience.
Detailed planning
Export of management skills.
Foreign partners.
Adaptation/Adopting ideas.

© McGraw Hill Companies, Inc., 2000

12-14
 Strategic Choice
Four basic strategies:
International strategy.
Multidomestic strategy.
Global strategy.
Transnational strategy.

© McGraw Hill Companies, Inc., 2000

12-15
 Four Basic Strategies

High
Global Transnational
Strategy Strategy

Cost
pressures
International Multi domestic
Strategy Strategy
Low

Low High
Pressures for local responsiveness Figure 12.4

© McGraw Hill Companies, Inc., 2000

12-16
 International Strategy

Go where locals don’t have your skills.

Little adaptation. Products developed at home
(centralization).
Manufacturing and marketing in each location.
Makes sense where low skills, competition,
and costs exist.

© McGraw Hill Companies, Inc., 2000

12-17
 Multi-domestic Strategy
Maximize local responsiveness.
Customize the product and marketing strategy
to national demands.
Skill and product transfer.
Transfer all value-creation activities, no
experience curve rewards.
Good for high local responsiveness and low
cost reduction pressures.

© McGraw Hill Companies, Inc., 2000

12-18
 Global Strategy

Best use of the experience curve and

location economies.
This is the low cost strategy.
Utilize product standardization.
Not good where local responsiveness
demand is high.

© McGraw Hill Companies, Inc., 2000

12-19
 Transnational Strategy
Christopher Bartlett and Sumantra Ghoshal
Core competencies can develop in any of the
firm’s worldwide operations.
Flow of skills and product offerings occurs
throughout the firm - not only from home firm
to foreign subsidiary (global learning).
Makes sense where there is pressure for both
cost reduction and local responsiveness.
© McGraw Hill Companies, Inc., 2000
12-20
The Advantages and Disadvantages of the
Four Strategies
Strategy Advantages Disadvantages
Global Exploit experience curve Lack of local
effects responsiveness
Exploit location Lack of
International economies local responsiveness
Transfer distinctive Inability to realize
competencies to location economies
Failure to exploit
Foreign Markets
experience curve
effects
Figure 12.6a
© McGraw Hill Companies, Inc., 2000
12-21
The Advantages and Disadvantages of the
Four Strategies
Strategy Advantages Disadvantages

Multi-domestic Customize product offerings Inability to realize location

and marketing in accordance
with local responsiveness
Transnational Exploit experience curve
effects
Exploit location economies
Customize product offerings
and marketing in accordance
with local responsiveness
Reap benefits of global learning
economies
Failure to exploit
experience curve effects
Failure to transfer
distinctive competencies
to foreign markets
Difficult to implement due
to organizational
problems
Figure 12.6b

© McGraw Hill Companies, Inc., 2000

12-22
Cost Pressures and Pressures for Local
Responsiveness Facing Caterpillar
High
Caterpillar
Tractor
Cost
pressures

Low Figure 12.5

Low High
Pressures for local responsiveness

© McGraw Hill Companies, Inc., 2000

12-23